Slow and steady wins the investing race

One of the reasons we are such big fans of the Easy Chair portfolio (which we've been following for the last two weeks), is because it fits with our philosophy of life, parenting, partners, vacations, gardening, renovations, cooking and investing. Keep It Simple Smartie.

One of the reasons we are such big fans of the Easy Chair portfolio (which we've been following for the last two weeks), is because it fits with our philosophy of life, parenting, partners, vacations, gardening, renovations, cooking and investing. Keep It Simple Smartie.

Eric Kirzner, professor of finance at the Rotman School of Management, agrees. "Retail investors, even those with portfolios as high as $500,000 or $600,000, should be invested in as simple a manner as possible, unless they're going to make investing, a lifetime hobby."

Kirzner points out that picking good mutual funds isn't an easy process, especially since fees have remained so high in Canada. Moving to the stock market, the endless search for "alpha," or returns higher than the market or a given benchmark index, is even harder.

So, most individuals with half a million dollars or more seek out wealth managers. But that can be a hit or miss process also, as Kirzner himself has discovered in his role over the years sitting on pension plan boards.

"I've spent a lot of time interviewing managers and I am seeing my share of them who do not beat the index."

A pension plan may utilize the services of many different money managers to benefit from expertise in a variety of areas and investment styles. "But individuals can't get that diversification," Kirzner points out. "If you've got a million dollars and you make a mistake and pick the wrong manager, you're in serious trouble."

Kirzner invested an imaginary $50,000 for our column back in 1997. He chose a passive approach and we dubbed his selection the Easy Chair. Kirzner believes that professional investors, let alone the average investor, rarely beat the market. In that light, he suggests investors tie themselves to the market via exchange traded funds while not hampering their performance with high fees.

The original Easy Chair featured only four investments: 20 per cent went into the Beutel Goodman Money Market fund, 30 per cent into a 5-year Canada Savings Bond, 35 per cent into TIPS 35 and 15 per cent into SPDRs.

The Easy Chair looks pretty much the same today. The bond has matured and Kirzner invested the money in one of the new bond exchange traded funds (ETFs). He chose iShares CDN Bond Index Fund (ticker symbol XBB), which replicates the performance of the Scotia Capital Universe Bond Index. It is a medium-term bond index holding federal, provincial and municipal bonds as well as investment grade corporate bonds. The return, since inception in 2000, is 6.72 per cent.

Kirzner says he is content to stay with the Beutel Goodman Money Market fund, but if he were beginning the portfolio today he would simply choose a one-year GIC.

He is also sticking with the U.S.-listed SPDRs. However, passive investors now have a made-in-Canada option with XSP, another iShares exchange-traded fund that mirrors the S&P 500.

The XSP has been the sad sack of the Easy Chair. Though the one-year return on the index is 13.19 per cent, the return since the XSP came into being in 2001 has been minus 1.16 per cent, thanks to the market flop of that year and also the powerhouse Canadian dollar.

Here's an interesting statistic. The category of U.S. large cap equity mutual funds has a minus 8 per cent annualized return. So, while the index has lost a little over 1 per cent, the category has, on average, lost 8 per cent.

The Easy Chair has held the S&P 500 index since 1997 and the overall return is a more palatable, though hardly stellar, 4.9 per cent, once the ups and downs of the loonie are taken into account.

Since the original TIPS 35 no longer exists, the Canadian equity portion was moved into XIU, an exchange traded fund that tracks the S&P/TSX 60 Index of the 60 largest Canadian companies.

The 60 index has had 3-year returns of over 20 per cent, but don't get all giddy about those numbers. The Easy Chair is about aiming for long-term market averages and the return, since inception in 1999 of this ETF, is a more sensible and historically appropriate 10.61 per cent.

The Easy Chair, which started at $50,000 a decade ago, is now worth $115,147.78, an increase of about 130 per cent. The average annual compounded return is just over 8.7 per cent.

"I promised my portfolio would never shoot out the lights," Kirzner says. True, but few portfolios we see come anywhere near that return and most of them are far riskier with a much heavier weighting in equities and specialty sectors.

Kirzner still stands by the content of the Easy Chair and believes most investors would profit far more by mimicking Rip Van Winkle rather than Speedy Gonzales in their investing habits. Pick a diversified asset allocation (in this case 20 cash, 30 bonds, 50 equities), invest in the appropriate indices and then snooze off until it is time to add new money, make a withdrawal or rebalance.

"The financial universe has changed a great deal since we began this experiment," he notes. "There was a limited choice of ETFs. More choice today is generally good. On the other hand, trying to pick and choose which ETF puts investors back in the same quandary and back to market timing and stock picking."

If Kirzner were to craft a new Easy Chair today he admits he might add a bit of international or possibly a small-cap ETF. On the other hand, its simplicity makes the portfolio easy to understand and manage. And that was the whole point of the exercise.

There are costs associated with investing the Easy Chair. The ETFs have management fees, though they miniscule. The XIU, for instance, has an MER of just 0.17 per cent.

ETFs trade just like stocks. Accordingly, you have to be careful not to run up trading fees. One option is to pool new money in a high-interest savings account then invest once a year. Monthly is better from a dollar-cost-averaging standpoint, but not if your advantage is wiped out by trading fees.

Similarly, if the Easy Chair were in a RRIF, withdrawals should be done no more than once or twice a year to save on fees. Rebalancing can be done at the same time.

Thus endeth our three-part fable of the little portfolio that could.

The Portfolio Doctor appears Sunday. Send your portfolio, comments or questions to The

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